Welcome to Delancey Street. We are a nationwide business debt settlement company that helps salon and spa owners nationwide.
Salons and spas are very exposed to merchant cash advance troubles
Salons and spas are very exposed to merchant cash advance troubles because their revenue swings by season, by their stylists, and by the weather. Unfortunately, your daily and weekly payment is fixed and does not change at all. Most MCA agreements pull a fixed daily or weekly payment from the operating account regardless of how many people are sitting in a chair in your nail salon or spa. If you’re going through a slow stretch, that can truly turn into a catastrophe because the daily fixed ACH is still going to go out every day. If any of those payments are returned, then it is likely a default notice will be issued against you by the lender.
At Delancey Street, we work with owners in that window, and the most useful thing we can offer before collections begin is a map of what the funder can actually do, in what order, and what facts change the answer. Most importantly, we can represent you and help you when it comes to combating predatory MCA lenders.
The default begins on paper long before you miss a real payment
Often the default begins on paper long before you miss a real payment. If you read your MCA agreement, specifically the default section, you will find events that have nothing to do with nonpayment. For example:
- Say you block or change your bank account.
- Say you switch credit card processors.
- Say you’re closed for renovation.
- Or say you take a second advance without their consent.
- Or say you let a bank account go negative.
That can be defined as breach. That matters because the entire collections process is triggered by the declaration of default, not by your actual position or the health of your business.
Owners often think that they bought time by moving banks to a new institution after they bounce a payment. In practice, what they’ve handed the funder is a cleaner and faster claim because the contract has already placed them into a situation of default. The rule is simple: the funder’s leverage grows the minute you take any action without their permission. Fixed withdrawals that continue while sales fall are exactly the situation that we deal with at Delancey Street.
Invoke the right of reconciliation properly
The second thing that you have to really think about is whether or not you’ve invoked the right of reconciliation. It’s important that you invoke it properly, otherwise it is not honored and it is not something that will protect you. Nearly every modern MCA contract contains a reconciliation clause, which is the promise that if your revenue goes down, the amount they’re taking on a daily basis will get adjusted to its agreed percentage of actual sales rather than a fixed dollar amount. The implementation of the reconciliation clause is what legally allows them to charge you rates far above state and federal interest rates.
Unfortunately, this is a procedural process. These clauses typically require a written request within a defined window that’s supported by either bank statements or your credit card processing reports, and some make reconciliation discretionary rather than automatic.
| A salon owner who calls the funder but gets a brush-off verbally and stops paying | A salon owner who sends a documented request on time |
|---|---|
| Usually has not preserved anything that would prove that they tried, in fact, to invoke the reconciliation agreement, reconciliation clause. | Has evidence for court later that they tried to invoke the agreement and potentially has the opportunity to actually get the reconciliation clause invoked. |
The UCC-1 filing that was filed at the funding time
The next thing you have to worry about is the UCC-1 filing that was filed at the funding time. Almost every funder files a <strong>UCC-1 financing statement</strong> against your business assets at the time of funding, and that filing is generally effective for five years, with the option of continuing it. Because the funder is claiming a purchase of your future receivables, it can send notices under UCC laws directing your credit card processor to pay the funder instead of you.
There’s a lot of case law which has noted that redirection by the MCA lender is a legitimate lending mechanism, but that the duty to redirect depends on the sender. Recipients can request a reasonable proof, but often most people who get these UCC lien notices, like credit card processors, will automatically honor it. Some will decide to do nothing, but instead just freeze your funds on hold with them.
For a salon or spa, the practical exposure is very specific. You will continue servicing clients, but meanwhile your funds will not reach your bank account. The UCC lien notices hurt you where it hurts the most: your cash flow, because the minute the UCC lien notice gets sent to your payment processor, all cash flow is halted.
Frozen accounts that come from judgments
The next thing to ponder when you’re thinking about defaulting on a MCA is the frozen accounts that come from judgments. Often you’ll see collection calls, demand letters, and threats of immediate seizure for your money. Funders typically need a judgment first, and then will use post-judgment enforcement in order to restrain your bank account. In New York, for example, the restraining notice statute lets a lender serve a notice that freezes your property with an amount that is equal to twice the amount due by the judgment.
Historically, funders would shortcut the lawsuit process entirely using confessions of judgment that were signed at closing, which is why New York State amended its rules. Now, in order to enforce a COJ, the business has to be in the state of New York. Having said this, this does not change or eliminate the risk. Many funders have shifted to other states in order to compensate for this new legal hurdle.
Action against lenders has not created new laws
Another fact to consider is that while many legal bodies have taken action against lenders, for example, the FTC’s commission against Richmond Capital and its owner, or the New York State lawsuit against Yellowstone Capital, this has not created new laws which can protect you. While rulings do exist that have created precedent that can be used as part of an overarching strategy, this does not mean that today, after you miss a payment, you are protected.
A true purchase of receivables or a disguised loan
Here’s what really actually changes the outcome. The single most consequential legal question is whether the loan you took or the MCA you took is a true purchase of receivables or a disguised loan. As you may well know, most loans have a cap on how much interest rate can be charged. MCAs are able to get around that due to the fact that they are purchasing your future receivables. Typically, an analysis of will be done in order to recharacterize this as a loan in court. They’ll look at things like whether the reconciliation clause was actually honored. They’ll look at things like whether the fixed daily payment was a function of your revenue or whether it was fixed regardless of your revenue. If those facts point to a loan, usury and other defenses are available to you.
Consider timing before you default
Say you’re a spa owner and you’re looking at a potential default. The most important thing now is to consider timing. If you have not yet defaulted, but you suspect you might default in a few days or a few weeks, it’s important you request a reconciliation because it preserves the argument that you honored the contract. If you go silent and miss three payments, that’s practically asking for a lawsuit and having a restraining order placed on your account or UCC lien placed against your credit card processor. Often, we have been able to negotiate a reduced amount via the reconciliation clause by building a bulletproof argument that your revenue has gone down and therefore the daily debits or weekly debits have to go down.
A second or third advance is a mistake
Often we see many business owners will take a second or third advance in order to cover up for the daily deficits of the first one. We would call this a mistake because all it does is buys you time, but now you’re paying more interest.
Lump sum payment or restructure the debt into better terms
If you are in a situation where you’re unable to keep up with payments, it is best to either focus on reconciliation or discuss a formal settlement process where you can restructure the debt into better terms. Typically, you can either engage in a lump sum payment. Often lenders will take a discount in order to get a lump sum out of you, or you can work with Delancey Street to restructure your debt into a more long-term alternative.
Bottom line is, MCA and MCA collections is a very black and white protocol. The default clause decides when all of this starts ticking against you, and if you have the right help, it is possible to survive.
